Millions of pensioners to pay an extra £3,019 in huge retirement tax bill

MILLIONS of pensioners will have forked out an extra £3,019 in income tax once the thresholds are unfrozen in 2028.

Normally, tax thresholds increase every year to account for the fact that wages have risen in line with inflation, as this stops people being left worse off in real terms.

In April 2021, the then-Conservative government made the decision to freeze all tax thresholds, a measure now set to remain in place until 2028.

While the cost of essential goods and services has risen significantly, income tax thresholds have stayed unchanged.

This decision was aimed at raising additional revenue, as freezing the thresholds means more people end up paying tax or being pushed into higher tax brackets.

However, this has left retirees facing much higher tax bills simply to maintain their current standard of living.

This phenomenon, known as fiscal drag, occurs when incomes and spending increase to keep up with inflation, but tax thresholds remain static, resulting in a higher tax burden.

For pensioners, it highlights a system that hasn’t adapted to the realities of rising costs.

As tax thresholds have remained frozen, a typical pensioner earning £327 a week (before housing costs), which amounts to an annual income of £19,189, is expected to pay £9,261 in income tax by 2028.

If income tax thresholds had risen in line with inflation since 2021, this amount would have been lower at £6,242.

As a result, pensioners are forecast to pay an extra £3,019 in tax simply because the thresholds have not been adjusted to account for inflation.

Shaun Moore, tax and financial planning expert at Quilter: “Due to years of unchanged thresholds, pensioners are gradually being pulled into paying more tax.

“What was once considered a modest retirement income is now subject to increasing levels of tax each year as tax bands remain frozen in time.

“This has led to an unexpected additional £3,000 tax burden that many pensioners were not prepared for.

“Although it may not seem like a tax hike, the financial strain is very real for those on fixed incomes.”

It comes just days after The Sun revealed that 8.2million people over the age of 60 will be dragged into paying income tax by 2027/28.

And those are only some of the millions of households expected to have to start paying income tax as a result of the ongoing freeze to tax thresholds.

Data provided by HMRC through a freedom of information (FOI) request by wealth manager Quilter, shared exclusively with The Sun, shows nearly 18million people will be forced to pay income tax overall.

Of those, 11.6million will be affected over the next three years, with 8.2million of those individuals over the age of 60.

This suggests millions of people in receipt of state pension or other pensions will start paying tax on their retirement income for the first time.

Additionally, 12million people are set to be dragged into the higher rate of income tax, which is 40% of any income over £50,271, with 8.2million expected to be hit in the next three years.

The state pension rises each year under the “triple lock” system, which ensures it increases by whichever is highest: wage growth, 2.5%, or September’s inflation rate.

This year, the rise is based on wage growth, resulting in a 4.1% increase.

As a result, the full rate of the new state pension has gone up from £221.20 per week to £230.25, equating to £11,973 annually.

Meanwhile, the basic rate of the old state pension has risen from £169.50 per week to £176.45, totalling £9,175.40 per year.

The personal allowance — the amount you can earn each year without paying tax — remains fixed at £12,570.

If your income exceeds this threshold, you will be required to pay income tax on the amount above £12,570.

How much income tax do you have to pay?

You currently pay no income tax if you earn £12,570 or less.

On earnings between £12,570 and up to £50,270 you pay the basic income tax rate of 20%.

So, if your earnings are £20,000, you pay income tax on £7,429.

Earnings between £50,270 and up to £125,140 are taxed at 40%.

The additional income tax rate, which applies to earnings over £125,140, is 45%.

Income tax thresholds generally rise yearly so that people can earn more without paying more tax.

However, the Government has frozen them in recent years in order to boost its coffers.